Ethiopia Constraints Analysis Report 2020 · Ethiopia’s inexpensive labor pool, emerging domestic...

Millennium Challenge Corporation

Ethiopia

Constraints Analysis

Report

2020

1

This Constraints Analysis was jointly undertaken by MCC and the partner government to inform the development of a Millennium Challenge Threshold Program. However, neither the collaborative process underlying the Constraints Analysis nor its appearance on this website constitute an endorsement by MCC of the content presented therein.

2

An Analysis Prepared by the Government of Ethiopia and the Millennium Challenge Corporation of the

United States of America for the Development of a Millennium Challenge Threshold Program

2020

3

Contributors

Government of Ethiopia

Millennium Challenge Corporation

Barry Deren

Mesbah Motamed

4

Table of Contents

I. Executive Summary ............................................................................................................................ 5

Binding constraint to growth: the shortage of foreign exchange .......................................................... 6

Other Constraints Considered ............................................................................................................... 7

Conclusion ............................................................................................................................................ 8

Acknowledgements ............................................................................................................................... 8

II. Introduction ......................................................................................................................................... 9

III. Overview of the Ethiopian State and Economy ............................................................................. 10

Building a Multi-Ethnic State ............................................................................................................. 10

The Abiy Era ....................................................................................................................................... 11

From Development State to Market Economy ................................................................................... 12

Poverty, Growth, and Structural Transformation................................................................................ 14

Trade and Balance of Payments .......................................................................................................... 16

Vulnerable Populations: Displaced Persons, Youth, and Women ...................................................... 17

IV. Binding Constraint to Growth: Shortage of Foreign Exchange ................................................... 18

Origins of the Forex Shortage ............................................................................................................. 18

Effects of the Overvalued Exchange Rate and the Forex Shortage .................................................... 20

Evidence of the Binding Constraint .................................................................................................... 21

High Shadow Price ..................................................................................................................... 21

Changes in Changes .................................................................................................................... 21

Bypassing the Constraint ............................................................................................................ 23

Performance of Non-Forex Intensive Firms ............................................................................... 23

Gender and Social Inclusion Considerations .............................................................................. 24

V. Other Binding Constraints Considered .......................................................................................... 25

Power .................................................................................................................................................. 25


Finance ................................................................................................................................................ 26

Gender and social inclusion considerations ................................................................................ 26

VI. Non-binding Constraints Considered ............................................................................................. 27

Transport and Logistics ...................................................................................................................... 27

Human Capital .................................................................................................................................... 27


Land .................................................................................................................................................... 28


Water and Sanitation ........................................................................................................................... 29

5

Micro Risks ......................................................................................................................................... 29

Customs and Trade ..................................................................................................................... 30

Taxes and Tax Administration .................................................................................................... 30

Government Coordination .......................................................................................................... 30

Corruption ................................................................................................................................... 30

VII. Conclusion ......................................................................................................................................... 31

References .................................................................................................................................................. 32

Appendix 1: MCC Constraints Analysis Process ................................................................................... 35

Appendix 2: Heat Map of Constraints .................................................................................................... 36

I. Executive Summary

Overview

Over the last 15 years, Ethiopia has experienced the fastest per capita economic growth in Africa, averaging

around 6 percent each year. Much of this growth stemmed from investments in massive infrastructure

projects aimed at jump-starting the country’s structural transformation from traditional, rural, farming

activities to a modern, urban, industrial economy. Complementing these investments, Ethiopia has also

embarked on a series of political and economic reforms, shifting away from a one-party, state-led model of

development to a more democratic system that promotes a greater role for the private sector. The

combination of these trends has burnished the country’s profile among international investors keen to tap

Ethiopia’s inexpensive labor pool, emerging domestic market, and regional trade access.

These favorable conditions notwithstanding, Ethiopia remains one of the world’s poorest countries, with an

annual per capita income hovering around US $850 (or about $2,300 in purchasing power parity terms). Its

current population of 115 million is growing rapidly, averaging around 2.7 percent annually over the past

decade. And despite significant improvements over the past two decades, about 30 percent of the country

still subsists at or below the international poverty line of US $1.90 per day, and Ethiopia’s human capital

index, a composite measure of human skill, health, knowledge, and resilience, places it among the world’s

bottom 15 percent.

Eighty percent of Ethiopia’s population is rural and occupied mostly in agriculture, which accounts for

about one-third of the country’s GDP. But the sector’s productivity remains very low. Ethiopia, the

birthplace of the world’s prized Arabica coffee variety, only yields about two-thirds of the international

average. Productivity in food crops, including staples like wheat and teff, remain far below potential. Cash

crops, led by coffee, sesame, and cut flowers, account for about two-thirds of the country’s exports, but

revenues often hinge on volatile international markets. Meanwhile, opportunities for value-added food

processing go unexploited. Coffee exporters, for example, forego profitable roasting and packaging steps,

and livestock exports often amount to simply herding cattle across borders.

Debts to foreign creditors also hang over Ethiopia. While this debt helpfully financed the construction of

critical road networks, and power generation and distribution, borrowed funds also flowed to state-owned

enterprises (SEOs) with little useful output or productivity gains to show. Ethiopia’s SOEs dominate entire

swathes of Ethiopia’s economy, from transportation, banking, agriculture, power, and telecommunications.

6

Not only do these SOEs displace and exclude private firms, they operate inefficiently, often in the service

of political considerations. Preliminary steps to privatize some of these firms have raised hopes that market

forces may introduce new disciplines and innovations in the economy, but such benefits will not happen

overnight. Meanwhile, access to finance going forward has tightened as lenders perceive greater risks in

Ethiopia’s ability to repay.1

One hopeful glimmer appears in Ethiopia’s textile sector. Over the past decade, production in garments,

leather goods, and footwear have presented an opportunity to raise Ethiopia’s export income, grow its

manufacturing base, and gradually develop complementary industries. To support this emerging sector,

Ethiopia has built new industrial parks around the country dedicated to hosting textile and other

manufacturing activities. But early expectations of higher exports, more jobs, and transfers of know-how

and technology have gone largely unmet owing to roadblocks in the country’s logistics and transport,

inadequate power infrastructure, burdensome bureaucratic requirements, and the challenges of coaxing

young rural farmers to leave their traditional lifestyles and adopt radical new roles in urban settings.

Beyond the present challenges, two larger factors overshadow much of Ethiopia’s short to mid-term growth

path. The first is the global economic shock resulting from the ongoing COVID-19 pandemic. As worldwide

consumer demand plummets, markets for Ethiopian products overseas have contracted, choking Ethiopia’s

foreign earnings, critical for importing valuable inputs and repaying foreign denominated debts. Similarly,

Ethiopian Airlines, the country’s most successful SOE, has watched passenger and freight transport decline

in the face of travel restrictions and crashing markets. Access to finance has tightened even further as

investors flee from risk and political and economic pressures among donor countries potentially threaten

aid.

The second factor, Ethiopia’s vulnerability to political and ethnic division, is fraught with existential

significance. The country has long struggled to balance interests among its rival ethnic regions, particularly

among the Amhara, Oromo, and Tigray populations. The 2018 election of Prime Minister Abiy Ahmed,

followed by unprecedented new freedoms in the press and political activity, unbottled decades of pent-up

resentments and demands for representation and resources. In its most tangible instance, the Sidama people

voted in 2019 to break away from Ethiopia’s larger catch-all Southern Nations, Nationalities, and Peoples

Region (SNNPR) and declared their own, autonomous region. Threats to Ethiopia’s federation have also

surfaced from more radical separatist elements, manifesting in political assassinations, ethnic and religious

unrest, and riots in the capital Addis Ababa and throughout the countryside. The turmoil has provoked

forceful military responses from the Abiy government, and renewed restrictions on internet access, news,

and social media activities. Meanwhile, repeated delays of national elections, primarily due to COVID-

related logistical challenges, have nonetheless raised suspicions of authoritarian creep.

Binding constraint to growth: the shortage of foreign exchange

Based on MCC’s analysis of Ethiopia’s economy and the results of diagnostic tests, the main binding

constraint on the country’s economic growth is the shortage of foreign exchange (forex). The forex shortage

chokes output in nearly all sectors of Ethiopia’s economy. Import-dependent businesses, in particular, incur

losses, experience lengthy stoppages, and close frequently due to the difficulty of purchasing raw materials,

1 In response to Ethiopia’s promising steps towards economic reform, in January 2020, the World Bank and IMF

awarded it an aid package consisting of $6 billion of concessionary loans and grants

7

intermediate inputs, and spare parts necessary for operations. Stakeholder interviews repeatedly

emphasized the time and opportunity costs associated with securing forex and the government’s

unpredictable prioritization and allocation of forex uses.

A variety of signals point to the forex shortage as a binding constraint to Ethiopia’s growth. In the summer

of 2019, the black market rate for U.S. dollars exceeded the official rate by 50 percent, reflecting the urgent

demand among firms for foreign currency. Surveys and interviews reveal that the constraint has pushed

import-reliant businesses to halt production and even close their doors. Other firms have adapted by either

sourcing inputs domestically, entering export markets for the sole purpose of obtaining forex, or traveling

abroad to purchase inputs and paying steep import duties upon re-entry. Additional reports reveal that firms

exert greater pressure on government offices for forex access, whether through lobbying or bribes. Not

surprisingly, most surviving import-dependent firms are state-owned enterprises with preferential forex

access, firms operating within government-designated priority sectors, and foreign-owned firms with

independent access to forex.

The root cause of the forex shortage is Ethiopia’s currency regime which overvalues the Ethiopian birr

against the U.S. dollar. Ostensibly intended to facilitate Ethiopia’s economic transformation process, the

policy strengthens Ethiopia’s overseas purchasing power, making raw materials and machinery, critical to

building the country’s infrastructure, more affordable. But the currency regime also drives a wedge between

the quantities of forex demanded and supplied, resulting in a shortage at the official rate. Moreover,

sustaining the exchange rate in international currency markets also requires rationing domestically-held

foreign currency, resulting in allocative inefficiencies and costly wait-times. As a side note, the overvalued

currency also harms Ethiopia’s export competitiveness by pricing its goods artificially high, particularly in

competitive, internationally-traded commodities such as coffee and textiles.

Exacerbating the forex shortage are Ethiopia’s inefficient and loss-making state-owned enterprises (SOEs).

As alluded to above, years of poor management and low productivity across a variety of sectors have

resulted in ballooning foreign-denominated debts, leaving state-owned banks to cover the losses. Apart

from the burden of repaying these obligations with interest, these liabilities ultimately worsen Ethiopia’s

consolidated fiscal deficit, and pressure has grown on Ethiopia’s external balance.

Meanwhile, exports of goods and services are Ethiopia’s main source of forex earnings, and recent years

have witnessed a mixed performance. Overall, exports have risen about 50 percent over the past ten years,

reaching $7.6 billion in 2019, owing almost entirely to success in transportation services in the form of

Ethiopian Airlines. But after peaking in 2014, Ethiopia’s goods exports have fallen by one-fifth to about

$2.5 billion. Low productivity explains part of Ethiopia’s export struggles, but its undiversified export

basket of primary commodities, already disadvantaged by the overvalued exchange rate, also suffers from

volatile and falling global prices, particularly in coffee. Burdensome regulations and pre-20th century

systems of tracking, certifications, and licensing add further costs. Ultimately, without growth in Ethiopia’s

exports, forex earnings will not keep pace with the country’s demand for imports.

Other Constraints Considered

Following forex, the nearest binding constraints on private sector investments are Ethiopia’s power

generation and distribution and its access to finance. Ethiopia relies primarily on hydropower to generate

its electricity, but the growth of its population has outpaced the country’s generative capacity. Networks to

8

distribute that power, furthermore, either remain incomplete or have degraded due to poor maintenance.

These conditions result in low availability and frequent outages which interrupt production and raise costs

for firms which rely on a steady, predictable power supply. Recent developments offer hope that these

constraints may be relaxing soon. The Grand Ethiopia Renaissance Dam, currently nearing completion,

promises to alleviate much of the power generation constraint, and the Ethiopian government has dedicated

resources to supply power to its industrial parks to ensure uninterrupted access for its budding

manufacturing sector.

Access to finance— this refers to a firm’s ability to access financial markets to undertake investments and

other operational requirements— also appears as a prominent obstacle based on private sector feedback.

Ethiopia’s banking sector has operated under onerous regulations, the greatest of which was a government

bond purchase requirement equal to 27 percent of a bank’s private loans. While such bonds eventually

mature and get repaid, the up-front diversion of the capital to non-market driven government spending

constrains the supply of loanable funds to the private sector. Additional restrictions governing foreign-

owned banks, deposit reserves, and collateral further curtail access. Finally, the state-owned Commercial

Bank of Ethiopia, the largest holder of deposits in the country, dominates the banking sector, discouraging

private sector innovation and risk-taking. Reforms to Ethiopia’s banking sector have gradually begun,

however. The bond purchase requirement was lifted in late 2019, and recent evidence from private banks

suggests a new willingness to tailor products to traditionally underserved small and medium enterprises.

The analysis also touched on other possible constraints, including transportation and logistics, human

capital, and land use, as well as general issues related to government performance. While problems certainly

exist across these dimensions, the analysis observed trends towards improvement or judged their impact to

be comparably small.

Conclusion

The country team identified Ethiopia’s shortage of foreign exchange as the top binding constraint to the

country’s economic growth. Additional, though less binding, constraints appear in the power sector and

access to finance. As Ethiopia struggles to manage its external debts, new pressures and incentives will

likely encourage the country to accelerate its currency’s devaluation and introduce greater market

disciplines into its sprawling SOE-dominated economy. Evidence to date shows a gradual birr devaluation,

about 12.5 percent over the first eight months of 2020, but so long as distortions remain, shortages will

persist. In addition to currency reform, tentative steps to privatize certain SOEs and efforts to accede to the

World Trade Organization signal the government’s interest in ushering the country’s economy onto the

global stage. These positive signals notwithstanding, Ethiopia still faces a raft of economic and political

challenges that can disrupt its early progress. Conflict and strife rooted in ethnic tensions will continue to

occupy the government’s attention and potentially raise the stakes of risky reforms to SOEs that stand to

create winners and losers

Acknowledgements

This CA builds on previous work including USAID’s 2014 report, a parallel constraints analysis by Harvard

University’s Center for International Development, and research by Dalberg International. This CA’s team

also benefited from conversations and consultations with three important groups: (1) the staff of several

Ethiopian ministries and government agencies, particularly our early counterpart in the Ministry of Finance,

Ato Kokeb; (2) representatives of the Ethiopian private sector, to better understand the constraints they

9

perceive in starting, operating, and expanding their businesses; (3) a variety of non-governmental

organizations and foreign donors whose observations helped shape our own views. See Appendix 1 for

more details on the CA process. The team thanks all participants for their cooperation and openness in

sharing information that was vital to drafting this report.

II. Introduction

The Millennium Challenge Corporation (MCC) Board of Directors (the Board) selected Ethiopia for a

Threshold Program (THP) in December 2018. The Board’s selection recognized that under the leadership

of Prime Minister Abiy Ahmed, Ethiopia has embarked on unprecedented political and economic reform,

shifting from a one-party, state-led model of development to a more democratic system with a greater role

for the private sector. The moment provides MCC with an opportunity to support policy and institutional

reforms in Africa’s second most populous country and eighth largest economy. But notwithstanding

Ethiopia’s early successes, ethnic violence, separatist movements, and the internal displacement of millions

of inhabitants threaten the country’s long-run progress. The emerging global COVID pandemic, meanwhile,

looms over the country’s economy and has repeatedly led to delays in parliamentary elections, straining

Ethiopia’s fragile ethnic federalist system.

As a first step in designing a Threshold Program, MCC prepared this Constraints Analysis (CA), in

consultation with Harvard University’s Center for International Development and counterparts in the

Government of Ethiopia, to survey the performance of Ethiopia’s infrastructure, banking, macro-economy,

human capital, and economic policies and governance. See Appendix 1. Through data collection, a literature

review, stakeholder interviews, and a series of empirical tests derived from Haussman, Rodrik, and

Velasco’s Growth Diagnostic (HRV, 2005), the CA identified specific bottlenecks constraining private

investment in Ethiopia.

The results of the analysis point to Ethiopia’s shortage of foreign exchange (forex) as the primary binding

constraint. The forex shortage severely limits firms’ abilities to import critical inputs necessary for

production, expansion, and exports, depressing private investment and ultimately harming the country’s

growth. It is the proximate cause of Ethiopia’s recent growth slowdown and lagging performance in the

government’s Growth and Transformation Plan. Secondary, less binding constraints are Ethiopia’s

unreliable access to electricity, which interrupts production, particularly among Ethiopia’s critical, forex-

earning export manufacturers, and access to finance which poses sizable obstacles to investment, especially

for small and medium enterprises (SMEs).

This report presents an overview of Guatemala’s economy and society, summarizes the main findings of

the CA, outlines and explores the binding constraints in greater detail, and dedicates a brief section to other

aspects of the economy judged to be less- or non-binding.

10

III. Overview of the Ethiopian State and Economy The political economy of present-day Ethiopia

consists of two conflict-dynamics: (1) long-

simmering rivalries among geographically-separated

ethnic groups competing for national influence and

resources, and (2) the increasing friction between the

“development state” model of economic

management and modern, capitalist forces and global

connectivity. Operating in the background and

shaping these two conflicts is the persistent legacy of

Ethiopia’s historically repressive, hierarchical state

apparatus.

Building a Multi-Ethnic State2

Situated in the Horn of Africa (Figure 1), Ethiopia’s

record of empire and state-building stretches back for

millennia. The ancient Kingdom of Aksum, a

merchant economy situated along shipping routes

between Rome and Asia, originated in the fertile

highlands of Northern Ethiopia and Eritrea, and at its

peak, extended across parts of Somalia, Sudan, and

Yemen. Enduring for nearly 900 years, the Aksumites were among Christianity’s earliest adopters, and

centuries later, offered refuge to Islam’s first believers escaping hostile Arabian tribes, foreshadowing the

country’s religious diversity. By the end of the first millennium AD, the Kingdom had faded, but beginning

in the 13th century, its Amharic-speaking descendants established a new monarchy, and over time, extended

their rule over neighboring populations, including Oromos, Tigrayans, Somalis, and a mélange of smaller

ethno-linguistic groups throughout the country’s South. Over the ensuing six hundred years, the empire

forged alliances and contended with threats from near and abroad, while expanding and consolidating

control across the Horn of Africa. By the turn of the twentieth century, however, its strength and influence

had mostly waned, and Ethiopia amounted to a collection of fiefdoms.

In 1930, Ethiopia coronated a new emperor, Haile Selassie, an Amhara who claimed a lineage tracing back

to the ancient Aksumites and the biblical King Solomon. Selassie signaled the desire to open a new chapter

of political and economic modernization, reviving hopes for the country’s development. Progress halted,

however, owing to fascist Italy’s invasion and occupation from 1936 to 1941. Exiled from his country,

Selassie issued a famous appeal for support from the League of Nations, and with the assistance of British

allies, Ethiopia regained its independence. But while his country’s international profile grew, Selassie’s

domestic reform agenda continued to stall due to resistance from the country’s landed nobility. Human

rights abuses, failed harvests, and economic crises further eroded the Emperor’s popularity. Conditions

2 Much of the information drawn for this section comes from Guilain Denoeux’s 2019 report “Perched Between

Promise and Foreboding: A Political Economy Analysis of Ethiopia” and Library of Congress publication from 1993

entitled “Ethiopia: a Country Study.”

Figure 1 Map of Ethiopia.

Source: CIA World Fact Book

11

worsened to the point that a group of low-ranking army officers, upset about pay and benefits, seized the

opportunity to overthrow the Emperor in 1974 and ushered in the period of the Derg regime.

The Derg, under the command of Mengistu Haile Mariam, upended Ethiopia’s monarchical structure,

violently purged the country’s political elites, and over a two year span, murdered hundreds of thousands

of perceived enemies in an episode dubbed the Red Terror. The regime imposed a new, radical Marxist

ideology upon the population, nationalized land, resources, and firms, and in a particular affront to

cherished religious tradition, disestablished Ethiopia’s Orthodox Church. Bouts of civil conflict

periodically erupted over the course of fifteen years as the population bristled under the regime’s heavy

hand, while devastating famines repeatedly afflicted the countryside. In 1991, opposition crested as a new

entity, the Ethiopian People’s Revolutionary Democratic Front (EPRDF), led an insurgency and ousted the

Derg. In the process, Eritrea, which had fought alongside the EPRDF against the Derg, declared its

independence, and Ethiopia soon became landlocked.

The EPRDF, an umbrella alliance of four ethnically-based political parties, rapidly consolidated control

over Ethiopia’s institutions and penetrated the country’s entire geography, down to the village-level.

Critically, the party converted Ethiopia’s unitary state into a republic of nine federated regions based on

ethnicity, effectively overturning centuries of Amhara rule over the region. Instrumental to the EPRDF’s

formation was the Tigrayan Peoples Liberation Front (TPLF), which quickly rose to dominance within the

organization. Tigrayans, who account for only about 6 percent of Ethiopia’s population, rapidly assumed

control of the country’s key military, economic, and government levers. Not surprisingly, this fueled

resentments among the other member ethnicities, particularly the Amhara and Oromo.

The EPRDF brooked little dissent and signaled authoritarian instincts no different from their predecessors.

In 2005, following a surprisingly unfavorable election result, the government violently clamped down on

opposition leaders, media outlets, and demonstrators. The ensuing years saw dissatisfaction and unrest, due

to both familiar ethnic rivalries and growing levels of youth unemployment, and by 2018, bubbling tensions

forced the EPRDF to make historic concessions to the opposition, including the release of political prisoners

and the closure of detention and torture centers. But these gestures, while positive, only emboldened public

opposition, and ultimately, the party’s chairman and prime minister submitted his resignation.

The Abiy Era

In a bid to defuse tensions, Oromo and Amhara parties within the EPRDF collaborated to unseat the TPLF-

dominated leadership and appointed a new chairman and prime minister, a 41-year-old former intelligence

officer from the Oromo Democratic Party, Abiy Ahmed. This action closed the chapter on 27 years of TPLF

control within the EPRDF and thrust Ethiopia into a seemingly new era of uncharted political freedoms and

economic liberalization. Abiy accelerated the release of political prisoners including jailed journalists,

ended restrictions on the press, committed to privatizing state-owned enterprises (SOEs), and reached a

historic rapprochement with Eritrea after decades of armed conflict. Political exiles returned home, and

former armed rebels were forgiven. Abiy appointed prominent women to key positions in his cabinet and

the Supreme Court. “Abiymania” surged as the new prime minister’s popularity skyrocketed at home and

abroad, climaxing in October 2019 when Abiy received the Nobel Peace Prize.

The honeymoon was short-lived, however. As controls on expression and organization relaxed, Ethiopia’s

political landscape rapidly fractured as invigorated ethno-political groups re-asserted their agendas. The

EPRDF’s traditional ethnic balancing act was tumbling, and extremists discouraged each ethno-party from

12

compromising. Assassinations of key Abiy-allied politicians and military officials in the summer of 2019

roiled the country and raised the specter of renewed instability and attempted coups. In the most substantive

alteration to Ethiopia’s federation, the Sidama people, inhabitants of the Southern Nations, Nationalities,

and Peoples Region (SNNPR) voted for self-determination and formed an entirely new region in the

country. The example set by the Sidama raised concerns that the nearly fifty ethnic groups in the region

could follow a similar path of disintegration, including secession. By the end of 2019, the EPRDF dissolved,

and in its place, the new Prosperity Party emerge, composed of the same ethnic constituencies, with the

conspicuous exception of Tigrayans.3

From Development State to Market Economy

Beginning with the Derg and throughout the rule of the EPRDF, Ethiopia’s leaders managed the country’s

economy according to Marxist-style ideologies. Following centuries of aristocratic land holding, the Derg

swiftly nationalized Ethiopia’s resources and properties, returning vast agricultural lands to peasant control.

While this appealed to many farmers, land ownership now rested with the state, effectively removing all

market incentives for its productive use. Farmland quickly fragmented, investments in land improvements

plummeted, scale economies vanished, and agricultural production consequently suffered. Meanwhile,

important sectors, such as transportation, energy, pharmaceuticals, agriculture, and banking, fell under the

control of inefficiently-run state-owned enterprises (SOEs).

Throughout the 1990s, under the EPRDF, Ethiopia waged a campaign of state-managed infrastructure and

economic development, a policy dubbed the “development state.” The government invested in

infrastructure, particularly in power generation and transportation, with the goal of jump-starting the

country’s transition from rural, subsistence agriculture to an urban, industrial economy. Ethiopia’s SOEs,

charged with leading this effort, relied heavily on imported raw materials and equipment for building dams,

electric grids, roads, schools, and other infrastructure. These investments led to spurts of improvement in

agriculture and various indicators of human well-being. But these imports, financed by overseas lenders,

led to foreign-denominated, interest-bearing debts, adding pressure to the country’s fiscal position.

Domestic private sector activity, while not explicitly forbidden, operated within tightly circumscribed

conditions and languished under a regulatory apparatus that was at once opaque, unpredictable, and even

hostile to entrepreneurs and investors.

One component of Ethiopia’s import-intensive development strategy was its exchange rate regime. Upon

the gold standard’s collapse in 1971, Ethiopia pegged its currency, the birr, to the US dollar at the rate of

2.30 birr to US $1 (Dagnew, 1992; Degefa, 2001). With the exception of a handful of punctuated

devaluations, this exchange rate regime conferred stability on the price level of imports, critical to achieving

Ethiopia’s infrastructure goals. But the US dollar’s gradual appreciation over time alongside Ethiopia’s

domestic inflation led to a sustained overvaluation of the birr, artificially raising its overseas purchasing

power. Ethiopia’s government, like many of its peer economies throughout Africa, exploited this

3 Following the release of the Constraints Analysis results in late 2019, several developments have complicated

Ethiopia’s near-term outlook. The COVID-19 pandemic not only shocked the country’s economy but also led

authorities to repeatedly postpone elections originally scheduled for May 2020, a decision which provoked suspicion

among the Prosperity Party’s rivals as a power-grab. In defiance of the Abiy-led government, the Tigray region

nevertheless held elections, raising new questions about the stability of Ethiopia’s federal system. Meanwhile, the

assassination of a beloved Oromo singer further inflamed already simmering ethnic tensions, provoked protests and

violence- throughout the country.

13

overvaluation to obtain imports at low prices. But propping up the birr’s value at the pegged rate required

Ethiopia’s central bank to spend dollars. As preserving its forex reserves was a priority, Ethiopia

compensated by rationing any remaining currency to the private sector (Haile, 2019). This resulted in a

slew of problems: frequent currency shortages, currency queues, inefficient currency allocation regimes,

rent-seeking, fiscal deficits, and current account imbalances, all of which ultimately harm a country’s

economic growth prospects (Rodrik, 2008).

Beginning in the 2000s, debt-financed investments in infrastructure reached new highs, with public sector

annual borrowing approaching 9 percent of GDP in recent years (CID, 2019). Currently, publicly-held

external debt, i.e. overseas debt denominated in foreign currency, exceeds 30 percent of GDP, most of

which, according to the IMF (2020), has gone to covering Ethiopia’s rising import bills (Figure 2). But

while these heavily financed investments helped achieve rapid economic growth, in some years reaching

10 percent annually, very little of that growth translated into actual gains in productivity.4 Consequently, as

Ethiopia reached the limits of its access to foreign-financed credit, GDP growth has diminished by 3 to 4

percentage points in the last several years.

Figure 2 Ethiopia Public External Debt, Imports, and GDP.

Source: World Bank (2020a).

Recently, initiatives to relax Ethiopia’s “development state” approach and introduce market forces into its

economy have gained traction. As part of its Homegrown Economic Reform Agenda, Ethiopia has

advanced plans for privatizing potentially lucrative but inefficiently operated SOEs, particularly in

telecommunications and transportation, and its interest in reforming government’s regulatory role has

grown. For example, restrictions on Ethiopia’s bank lending have loosened, easing access to credit for

domestic borrowers, and new policies have created greater space for foreigners to hold equity in Ethiopian

firms. Parallel to these reforms, Ethiopia has channeled large investments into the construction and

operation of industrial parks throughout the country, geared towards efficiently connecting manufacturing

firms—mainly in garments and leather goods, but also in food processing— to power, transportation, and

4 Despite heavy investments in capital and infrastructure, total factor productivity growth outside of agriculture in

Ethiopia has not risen since 2011 (PSI, 2020)

0

20

40

60

80

100

1996 1999 2002 2005 2008 2011 2014 2017

current US$

(billions)

Public external debt GDP Imports of goods and services

14

other infrastructure, with the goal of stimulating growth in jobs, incomes, and crucially, forex-generating

exports.

Poverty, Growth, and Structural Transformation

Ethiopia’s per capita income has grown rapidly over the last two decades, averaging around 6 percent

annually (Figure 3).5 In 2019, the total nominal gross domestic product of Ethiopia’s economy was $96

billion, and its population was 112 million, sixty percent of which is under the age of 25.

Ethiopia’s rapid growth, however, has only delivered relatively modest reductions in poverty. Over the

period 1997 to 2016, every 1-percent rise in per capita GDP corresponded to a 0.19 percentage point

reduction in the poverty rate, the lowest rate among its comparators (World Bank, 2020c).6 For this reason,

Ethiopia’s per capita income hovers around $800 ($600 in year 2010 US$ terms). The country ranks 173rd

out of 189 countries in the Human Development Index, a composite value that accounts for income, human

health, and education. (UNDP, 2019). In 2015, the latest year for which estimates exist, almost one-third

of Ethiopia’s population earned less than the international poverty line of $1.90 per day (World Bank,

2020a). Nearly two-thirds fell under the lower middle-income poverty line of $3.20 (Ibid.).

Figure 3 Ethiopia Gross Domestic Product Per Capita, 1996-2019.

Source: World Bank (2020a)

Growth incidence curves further reveal that consumption growth occurred unevenly across the income

distribution, with the largest gains accruing to the highest two income deciles, and the lowest decile

experiencing zero growth (World Bank, 2020c). Cutting the data along geographic lines, most beneficiaries

of economic growth lived in Ethiopia’s cities with annual consumption growth ranging from 3 percent to

around 7 percent. In contrast, rural inhabitants in the lower half of the income distribution did not see their

5 Ethiopia’s economy overall grew much faster, around 10 percent per annum, but population growth absorbed much

of these gains. 6 World Bank (2020c) identifies Ethiopia’s comparator nations to be Tanzania, Burkina Faso, Uganda, Mozambique,

and Rwanda.

-8

-6

-4

-2

0

2

4

6

8

10

12

0

100

200

300

400

500

600

700

1996 1999 2002 2005 2008 2011 2014 2017

GDP percapitagrowth (%)

GDPper

capita (constant

2010US$)

GDP per capita GDP per capita growth

15

consumption grow more than 1 percent per annum (Ibid.). Consequently, Ethiopia’s rural poverty rate (37

percent) exceeds the urban rate (14 percent) by 2.5 times (World Bank, 2020b). And while overall income

inequality is not extreme relative to its peers, Ethiopia’s Gini index value has steadily worsened, climbing

from 0.30 in 2005 to 0.35 in 2015 (World Bank, 2020a).

Much of Ethiopia’s poverty hinges on its rural economy, namely agriculture. Two-thirds of Ethiopia’s

workers are farmers, and agriculture accounts for about one-third of the country’s GDP (Figure 4). Over

the past two decades, investments in infrastructure and extension services have helped raise agriculture

output and yields, particularly in cereals (Bachewe et al., 2018). Meanwhile, rising technology adoption,

i.e. seeds and chemical inputs, has increased total factor productivity by about 1 percent annually over the

past two decades (Ibid; Fuglie, 2019). This growth, particularly in cash crops, explains the bulk of

Ethiopia’s reduction in poverty over the past fifteen years (World Bank, 2020c). But Ethiopia’s agriculture

productivity gains, while impressive, began from a very low base, particularly in the aftermath of the Derg’s

destructive collectivization policies, leaving considerable room for additional growth. Today, sizable yield

gaps persist due to challenges of land tenure, input use, and irrigation (Berhane et al., 2020; Baye, 2017;

Bachewe et al. 2018).

Figure 4 Ethiopia Sector-Specific Value Added and Employment, 1996-2019.


Ethiopia structural transformation, the process by which an economy evolves away from traditional,

subsistence agriculture and into modern, urban industrial activities, has stagnated for reasons outside of

agriculture as well. The country’s industrial sector, with its relatively small share of current GDP (25

percent) and employment (7 percent), has struggled to grow.7 Today, most of the industrial sector consists

7 According to the World Bank, “industry” consists of mining, manufacturing, construction, and public utilities. Within

this category, manufacturing represents the activity in which the greatest value-added opportunities exist and the

“completion” of the traditional structural transformation process.

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

1996 1999 2002 2005 2008 2011 2014 2017

share of emp.(%)

value added

(billions,constant

2010 US$)

Agriculture Value Added Industry Value Added

Services Value Added Agriculture Employment

Industry Employment Services Employment

16

of non-tradable construction activity—roads, power plants, buildings—often financed with external funds.

Manufacturing, traditionally associated with successful structural transformation, currently accounts for

just one-third of Ethiopia’s industrial activity and has seen its share of the overall economy stall around 5-

6 percent. Over half of manufacturing activity is food and beverage processing, a sector with upstream

linkages to agriculture, but an emerging textiles and garment sector has attracted outsized attention due to

its potential for technology transfer, export growth, and forex earnings. Meanwhile, rapid growth in the

services sector now accounts for nearly half the country’s GDP. But while this growth tracks with increasing

urbanization, a hallmark of structural transformation, most of this sector remains informal, unskilled, and

relatively unproductive (Schmidt et al., 2020).

Trade and Balance of Payments

Ethiopia’s export sector, a key element of the country’s recent 5-year Growth and Transformation Plan II,

is small ($2.41 billion in goods, $4.92 billion in services in 2018) and undiversified (Figure 5). The value

of goods exports, the bulk of which are agriculture and food commodities like coffee, sesame, and cut

flowers, has flattened and even declined in spite of earlier rapid growth, in part due to falling international

prices. Manufacturing exports have fared no better. Despite receiving tax breaks, cheap credit, and easy

access to land, domestic manufacturers face a litany of obstacles to production. Chief among these are

scarce forex for importing critical inputs and a political economy that discourages domestic financiers away

from manufacturing, hindering firms from successfully competing in overseas markets (Siba and

Gebreeyesus, 2017; Oqubay, 2019). Meanwhile, foreign manufacturers, lured to the country with cheap

labor and industrial parks equipped with power, transportation, and other infrastructure, have struggled to

take off thanks to frictions between foreign management and local workers (Oqubay, 2019). For these

reasons and others, manufacturing exports, which peaked in 2013, have subsequently declined, currently

accounting for less than 10 percent of all goods exports. In contrast, services have steadily grown, due

primarily to the successful SOE Ethiopian Airlines and its regional cargo and passenger transportation.8

Figure 5 Ethiopia Exports, 1997-2018.


8 Ethiopian Airlines stands out among the country’s state-owned enterprises for its success and growth. Reasons for

its exceptional performance relate to the government’s hands-off approach to management, allowing the firm to

operate effectively as a private entity and without obligations to political or other concerns.

Manufactures

Food and agricultural

commodities

Transport services

All other goods and

services

0

1

2

3

4

5

6

7

8

1997 2000 2003 2006 2009 2012 2015 2018

Value of Exports

(current US$

Billions)

17

Weak exports have added pressure to Ethiopia’s balance of payments. For decades, imports exceeded

exports, often by a factor of two or more, a gap financed by remittances, foreign direct investment, and

private, bilateral, and multi-lateral lenders. According to Ethiopia’s Ministry of Finance (MoF), of the

portion of imports financed with external debt, SOEs accounted for nearly half (MoF, 2019), and their

opaque accounting and often politically-oriented objectives often resulted in waste and mismanagement,

effectively dumping the burden of external debt repayment on Ethiopia’s federal government and worsening

its fiscal position. By the end of 2018, Ethiopia’s external debt rose to around $27 billion, about 33 percent

of GDP and equal to four times its exports, prompting an upwards adjustment to its risk rating that triggered

new constraints on Ethiopia’s foreign borrowing (IMF, 2018). Under these tighter credit conditions, public

borrowing declined, relieving some pressure on the country’s balance of payments, but also dampening

Ethiopia’s growth trajectory (MoF, 2019).

Vulnerable Populations: Displaced Persons, Youth, and Women

Compounding all the political challenges above are the disproportionate struggles and inequalities facing

different segments of Ethiopian society. Most visible are Ethiopia’s 1.8 million internally displaced persons

(IDPs) (IOM, 2020). Armed conflict among rival ethnic groups directly led to 1.2 million displacements,

but an additional 500,000 are due to drought and floods that harm livelihoods and food security (Ibid.).

Meanwhile, Ethiopia’s demographics skew young—over half its population is under the age of 19— and

as a result, the country faces a burgeoning youth labor force. Growth in Ethiopia’s farm sector has helped

absorb much of this expanding labor pool, and rapid service sector growth in urban settings has also created

jobs. But youth unemployment in cities still remains high, currently around 20 percent (World Bank, 2017).

And while the burden of unemployment among Ethiopia’s rural youth appears lower than their urban

counterparts, most of their labor is unpaid, e.g. work on family farms, and education outcomes for this

segment lag far behind. As inheritances fragment farm plots and other land tenure constraints shrink the

supply of land, many of Ethiopia’s rural youth will migrate to cities in search of work, adding pressure to

urban economies (World Bank, 2017).

More broadly, women in Ethiopia face significant barriers to opportunities generated by economic growth,

despite recent legislations, initiatives and political appointments.9 Women in Ethiopia experience high rates

of unemployment, are less likely than men to be paid for their work, and are concentrated at the lower end

of manufacturing and other value chains (Buehren et al., 2019). While women dominate the informal private

sector—micro-enterprises are important survival strategies—Ethiopia’s rate of female-owned enterprises

in the formal sector is among the smallest in sub-Saharan Africa (Ibid.). Gender gaps in hourly wages,

agricultural productivity, and business sales cost the Ethiopian economy a total annual loss of $3.7 billion

to GDP (Ibid.). The unmet economic potential of women in Ethiopia links directly to gender disparities in

education and health, harmful cultural practices, and the burden of family care.

9 The amendment of the family law in 2000 called for fair wages, provided women the right to own and register

property in their own names, raised the legal marriage age from 15 to 18, and gave women greater say over marital

property and right to marital property in case of a divorce. The government also introduced a land certification law

that mandates married women to be registered jointly with their spouses. The recently formed Agricultural

Transformation Agency has been credited with promoting greater gender equality in agriculture.

18

IV. Binding Constraint to Growth: Shortage of Foreign Exchange

A variety of obstacles impede Ethiopia’s economic growth. The legacy of its Marxist governance and

political and ethnic tensions weigh heavily on the prospects for growth-friendly reforms, and economic

barriers, including its landlocked geography, inadequate power generation, and its limited access to finance

discourage private investment and firm growth. One factor, however, stands out for its acute effect on

investors’ abilities to establish, operate, and grow their firms, namely the shortage of foreign exchange

(forex).

Ethiopian firms unanimously point to the shortage of forex as a constraint on their ability to purchase critical

inputs from abroad. Missing inputs result in slowed or stalled production, delayed contracts, falling sales,

worker layoffs, lower investment, and ultimately slower economic growth. Ethiopia’s strategy for economic

growth relies on increasing manufacturing activity and exports in particular. So long as such capital-

intensive activities go without adequate machinery, equipment, and parts from abroad, the country’s

development goals will remain out of reach. For these reasons, the team judges the forex shortage to be the

top binding constraint on private investment and economic growth in Ethiopia.

Origins of the Forex Shortage

Ethiopia’s shortage of foreign exchange traces its origin to a long-standing currency regime that pegs the

local birr to the U.S. dollar.10 As described earlier, Ethiopia initially pursued this policy to stabilize its

exchange rate, but over time, as the dollar appreciated against other world currencies, the birr gradually

acquired greater overseas purchasing power. Domestic inflation, which averaged about 13 percent annually

over the past 15 years, widened the gap between the currency’s market value and its official exchange rate.

Obtaining imports at artificially lower prices allowed Ethiopia to finance its infrastructure goals more

affordably, import consumer goods more cheaply, and placate powerful economic interests.

To illustrate this gap in values, Figure 6 depicts the evolution of different indicators of Ethiopia’s currency

exchange rate. The US$-birr exchange rate (left axis) shows an 80 percent nominal depreciation over the

period 1996-2019. Similarly, the nominal effective exchange rate (right axis), a composite index across a

basket of currencies (year 2007 = 100) fell by about 70 percent. In contrast, the real effective exchange rate

(right axis), an index which adjusts the nominal effective exchange rate for relative rates of inflation across

currencies, rises by a stark 60 percent, revealing the effective upward valuation in the birr relative to its

trading partners.

10 More precisely, Ethiopia administers a “crawling peg” in which the birr is allowed to nominally devalue against the

dollar by no more than 6 percent annually.

19

Figure 6 Ethiopia exchange rate indicators, 1996-2019.

Source: World Bank (2020a) and Bruegel (2020)

Under fixed exchange rate regimes, governments enter currency markets to buy and sell their own currency,

shifting its supply or demand, until the desired rate is achieved. In Ethiopia’s case, maintaining an

overvalued birr effectively imposed a price ceiling on dollars well below the equilibrium market rate.

Figure 7 depicts the end result, in which the quantity of dollars demanded exceeds the quantity of dollars

supplied, i.e. a shortage of dollars. Black market transactions alleviate some of the shortage, but the

principle remains: Ethiopia’s overvalued exchange rate leads to a shortage of forex.

Figure 7 Market for forex (US$) under an overvalued fixed exchange rate regime

Ethiopia’s state-owned enterprises (SOEs) exacerbate the forex shortage. As described earlier, SOEs

frequently operate outside of market disciplines, mixing politics with profits. But thanks to their priority

access to forex (see section Effects of the Forex Shortage below), SOEs’ inefficient and wasteful operations

0

20

40

60

80

100

120

140

160

180

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

1996 1999 2002 2005 2008 2011 2014 2017

exch. rate index(year 2007=100)

US$/birr

US$/birr nom. eff. rate index real eff. rate index

20

often squander their forex resources. Consequently, over the past two decades, many SOEs have

accumulated large debts denominated in foreign currencies for which the Ethiopia government remains on

the hook as it prioritizes allocating scarce forex to debt service and ahead of private sector import needs.

Relatedly, to pay off debts in local birr currency, the Ethiopian government has resorted to “monetization”

by effectively printing more money, which further debases the local currency’s real value and widens the

gap with the official exchange rate.

Ethiopia’s trade imbalance also contributes to the forex shortage. Its export sector generates less than half

the forex necessary to cover the country’s import bill. As described above, Ethiopia’s goods exports

primarily consist of raw agriculture and food commodities that are vulnerable to swings in international

prices. Unable to carry out domestic value-added processing, Ethiopia forgoes large portions of a finished

product’s overseas value. Ethiopia’s manufacturing exports remain constrained by inadequate access to

finance, a burdensome regulatory state, and, in a reflection of the problem’s endogeneity, the lack of forex

to import critical production inputs. Even Ethiopia’s most promising investments in textile and leather

industrial parks, occupied by foreign firms unencumbered by issues of finance and forex access, have failed

to generate the volumes of forex the country desperately needs. Meanwhile, Ethiopia relies on imports for

basic food commodities-- annual wheat imports over the period 2014-2018 averaged about $200 million--

and other processed foods as well as simple manufactured goods (Simoes and Hidalgo, 2011). For many of

these goods, domestic production know-how exists, but logistical, bureaucratic, and final obstacles compel

buyers to source overseas, spending precious forex in the process.

Effects of the Overvalued Exchange Rate and the Forex Shortage

While Ethiopia’s overvalued exchange rate makes imports cheaper, its exports suffer due to higher prices

upon converting to other currencies. Coffee, sesame, cut flowers, and manufactured goods, Ethiopia’s most

important goods exports, become more expensive in overseas markets, a consequence that harms the

country’s export competitiveness, particularly in homogeneous commodity markets that compete on price.

To maintain the overvalued peg, Ethiopia’s central bank spends dollars from its reserves to prop up demand

for birr. Beginning in 2008, Ethiopia began rationing currency for import purposes (Dorosh et al., 2009).

Ethiopia identified firms within specific sectors, including fuel and pharmaceuticals, and SOEs involved in

infrastructure-related activities, as priority forex recipients. Non-priority sectors and firms must wait in line

for their turn to exchange currency, often for over a year (CID, 2019). This non-market arrangement has

predictably led to inefficient currency allocations, rent-seeking, and a black market for dollars that pays a

sizable premium over the official rate (Haile, 2019). Apart from rationing forex, Ethiopia also imposes

forex surrender requirements on commercial banks and tight time limits on firms holding forex, policies

which further constrain their operations. Banks are similarly forbidden from lending to non-priority sectors

in foreign currency, adding further pressure to import-dependent firms (CID, 2019).

The shortage also disadvantages domestically-owned manufacturing companies versus their foreign-owned

counterparts who easily access forex outside official Ethiopian channels. This harms home-grown efforts

to invest in sectors critical to Ethiopia’s economic development and job growth (Dorosh et al. 2009; Rodrik,

2008). Additionally, importers with privileged access to forex can obtain foreign-made inputs cheaply and

undercut locally-made substitutes, eroding Ethiopia’s domestic production capacity. More broadly, across

many countries, overvalued exchange rates and the resulting forex rationing ultimately harm economic

growth and worsen income inequality (Rodrik, 2008).

21

Evidence of the Binding Constraint

As described above, a variety of indicators point to the forex shortage as a binding constraint to economic

growth. The HRV growth diagnostics suggest four kinds of tests that can shine more light on the question:

(1) Does the factor have a high shadow price? (2) Do changes in the factor result in changes in firm activity

or growth in general? (3) Do firms attempt to by-pass the constraint to achieve their goals? (4) Do firms or

sectors that are not intensive in the factor thrive relative to others?

High Shadow Price

Prices signal the scarcity of a resource, and forex is no different. Firms unable to access forex to import

critical inputs for their production often turn to Ethiopia’s black, or parallel, market. This option for forex

has existed for years (Degefa, 2001; Dorosh et al., 2009), but as Ethiopia’s balance of payments position

has steadily worsened and its access to international credit markets has dried up, forex has grown

increasingly scarce, widening the gap between the official and the black market rate. Beginning around

2011, the spread between the official and parallel rate was around 5 percent but has steadily grown over the

years, reaching 30 percent in 2018 (Haile, 2019). By July 2019, the premium spiked to 50 percent (CID,

2019).11 Engaging the black market, of course, is illegal and entails risks, as the government alternates

between currency seizures and amnesties to motivate currency holders to surrender their dollars to banks.

Presumably, the black market rate builds in these risks and, as such, also lies below the market equilibrium

exchange rate.

Changes in Changes

As described earlier, Ethiopia’s overvalued exchange rate likely harms its competitiveness in export

markets. As the value of the birr has appreciated, goods exports, particularly in commodities for which

margins are thin and little room for absorbing exchange rate fluctuations exists, are expected to fall, ceteris

paribus. Evidence of such a link appears in Figure 8 which plots Ethiopia’s average annual real effective

exchange rate (REER) against its merchandise exports (as a fraction of GDP) for each year over the period

1996 to 2019. Ethiopia’s merchandise exports during this time consisted nearly entirely of agricultural

commodities with manufacturing goods ranging from 1 to 5 percent of GDP.

11 On Facebook, one page entitled “Ethiopia Birr Black Market Exchange Rate” reports crowd-sourced updates on the

black market rate for interested followers. According to the page, on April 12, 2020, the black market rate ranged

from 40 to 43 birr/US$, while the official exchange rate was 33 birr/US$, reflecting a premium between 20 and 30

percent.

https://www.facebook.com/Ethiopia-Birr-Black-Market-Exchange-Rate-275429032873421/?ref=page_internal

22

Figure 8 Ethiopia exchange rate valuation and merchandise exports (percent GDP), 1996-2019.

Source: Underlying data taken from World Bank (2020a) and Bruegel (2020)

From the plot, a downward sloping, statistically significant (p-value < 0.001) line fits the relationship

between the two variables, evidence that appreciation in the REER is plausibly associated with lower

merchandise exports.12 While this simple plot is only suggestive—additional controls are necessary to

account for correlated explanators—it offers a useful initial impression that Ethiopia’s currency

overvaluation harms its exports.

Published econometric studies show that a 1-percent devaluation in Ethiopia’s exchange rate correlates with

higher exports (0.52 percentage points) and higher real GDP growth (0.23 percentage points) (Nguyen,

2014). In an extension of this analysis, Haile (2015) disaggregated exports into manufacturing and

agriculture and reports disproportionately large effects on manufacturing, a result confirmed in larger cross-

country settings. In another study based on firm-level data, a 1-percent birr depreciation is associated with

a rise in export volume of 0.36 percent and manufacturing, specifically, of 1.18 percent (Mengistu et al.,

2017). Depreciation also aids new firm entry and export diversification as firms across a wider swathe of

sectors encounter profitable opportunities enter the export space (Molla and Berihu, 2019; Wondemu and

Potts, 2016).

In light of Ethiopia’s highly overvalued exchange rate presently, these estimated effects translate into very

large impacts on the country’s export position and growth trajectory. In short, evidence strongly suggests

that movement in Ethiopia’s exchange rate can drive changes in firm-level exports, total exports, and overall

GDP growth. One caveat bears consideration: Depending on the price elasticities of import demand and

export supply, the short-term effects of a devaluation may in fact harm the trade balance as the export

response takes longer to materialize while import costs immediately rise. Known as the J-curve, the trade

balance recovers gradually over the long-term, as suppliers and buyers eventually reallocate resources in

response to the new price signals.

12 The estimated coefficient is -0.04 and its t-statistic is -4.24. Interpreting the results, a 10-unit appreciation in the

real effective exchange rate is associated with a 0.4 percentage point decrease in manufacturing exports share of GDP.

Variation in the REER explains nearly half the variation in merchandise exports (R-square = 0.45).

0

1

2

3

4

5

6

7

8

9

10

50 60 70 80 90 100 110 120 130 140 150 160 170

merch.exports

(% GDP)

real effective exchange rate

23

Bypassing the Constraint

For firms unwilling to wait their turn in line for forex, several alternatives exist. As discussed earlier, firms

can buy forex in the black market. But meetings with stakeholders in country revealed other strategies to

either reduce the need for forex or obtain it through complex schemes. For example, where feasible, firms

have gradually sourced their inputs domestically, though this may entail additional costs and delays. In

other cases, firms establish offshore accounts into which foreign contacts (e.g. Ethiopian diaspora) can

deposit forex which firms then use to finance imports. Estimates suggest around half of all remittances to

Ethiopia arrive through unofficial channels (CID, 2019).13 In other instances, firm owners may travel abroad

to purchase their inputs and personally carry them back into the country, electing to pay import fines to

guarantee their business’ uninterrupted operations. And not surprisingly, rent seeking behavior is on the

rise, as firms compete for favors from policy makers in control of determining forex access (CID, 2019).

In more extreme cases, some firms obtain domestically grown coffee, sesame, soybeans, and other

agricultural commodities and sell them in foreign markets, often at a steep discount, solely for the purpose

of acquiring the forex to apply towards their core business. Frequently, the culprits are traders who import

consumer goods that can be profitably resold in local markets. Such currency arbitrage through the

cannibalization of exports has the perverse effect of undercutting Ethiopia’s traditional agriculture grower-

exporters, and in an ironic twist, depriving the country of the full forex value of its exports. During

stakeholder interviews with the country team, one of Ethiopia’s largest coffee grower-exporters reported

observing coffee discounts ranging anywhere from 1 to 7 percent, sizable amounts considering the razor-

thin profit margins of raw agricultural commodities. Other estimates reach as high as 20 percent (CID,

2019). The case of sesame is similar. In September 2019, FOB Djibouti export prices were 17 percent lower

than prices recorded at the Ethiopian Commodity Exchange (ECX) (FAS, 2020). In the year leading up to

September 2019, sesame’s average Djibouti-ECX price spread approached 10 percent. In response to these

issues, government has cracked down on commodity hoarders, revoked export licenses, and forbidden

export sales at prices below international levels. While well-intentioned and potentially effective, this

measure has also had the unintended consequence of adding more burdensome paperwork requirements,

namely documenting each sale’s profitability, on the very same exporters who initially voiced their

complaints.

Performance of Non-Forex Intensive Firms

If the forex shortage is indeed a binding constraint to growth, a testable hypothesis is whether sectors and

firms not intensive in imports and consequently unencumbered by forex requirements, account for a greater

share of both Ethiopia’s economic growth and size. Services fit this description more so than other sectors,

since it uses relatively fewer physical inputs for production, and as such, relies less on imports and forex to

operate.

Ethiopia’s service sector, led by communication and transport services, hotels and restaurants, as well as

wholesale and retail trading, has grown rapidly in the last decade, accounting for nearly 50 percent of the

13 One common channel is physically carrying cash directly into the country, often through airports. Ethiopia requires

travelers to declare large sums of foreign currency when entering the country and depositing it immediately in a bank.

But given the levels of traffic and the difficulties of monitoring, enforcement is spotty.

24

country’s overall GDP growth, vastly outpacing agriculture (21 percent) and manufacturing (7 percent).14

Consequently, services now occupies the largest share of the economy. As a first pass at the data, Figure 9

shows how much of that share may owe to the forex shortage, by plotting variation in the real effective

exchange rate (REER) over the period 1996 to 2019 against the corresponding yearly GDP share of these

three sectors. As the exchange rate’s valuation rises—a condition which worsens the forex shortage—

economic activity appears to shift into import-light services. In contrast, agriculture’s share appears to

decline in the face of REER appreciation possibly due to the heightened difficulty in obtaining inputs from

abroad (e.g. machinery, fertilizer) or the competitive impact of the overvalued exchange rate on crop

exports. Meanwhile, manufacturing’s share appears unresponsive, perhaps simply because it has no

appreciable room to decline.

Figure 9 Ethiopia Real Effective Exchange Rate and Sector Shares of GDP, 1996-2019.

Source: Underlying data taken from World Bank (2020a) and Bruegel (2020)

Conversely, a small fraction of import-intensive firms manages to succeed precisely due to their privileged

access to forex. Firms located in Ethiopia’s industrial parks, mostly garment and leather goods factories,

report little trouble securing the forex necessary for importing equipment and supplies. Such ease of access

owes entirely to their foreign ownership which supply forex to their Ethiopian operations independently of

Ethiopian channels. Meanwhile, Ethiopian SOEs also enjoy priority access to the country’s forex supply

by virtue of their involvement in top-tier sectors (e.g. construction, transportation) and close relationships

with the Commercial Bank of Ethiopia.

Gender and Social Inclusion Considerations

Women in Ethiopia own nearly 40 percent of food and beverage production, 10 percent of textiles, and 17

percent of import-dependent wholesale and retail businesses. Accordingly, forex shortages and an

14 The World Development Indicators’ all-encompassing “industry” sector includes not just manufacturing but also

mining, construction, and large public works projects including hydropower dams, railways, and roads. Since so many

of these activities are publicly financed and unconstrained by the forex shortage, we limit the analysis to

manufacturing, which is more heavily populated with private sector actors.

0

10

20

30

40

50

60

70

60 80 100 120 140 160 180

GDPshare

(%)

real effective exchange rate

services manufacturing agriculture

25

overvalued exchange rate inhibit a wide swathe of women-run firms and activities. Moreover, barriers

facing women in accessing finance, particularly beyond microenterprise loans, threaten to diminish any

share of the benefits from improving access to forex. Additional ethnic dimensions of forex access and

credit merit attention since much of the formal banking sector and MFIs in Ethiopia is organized along

ethnic lines.

V. Other Binding Constraints

Evidence suggests that power and access to finance constrain private sector investment and economic

growth in significant ways. But recent and near-future improvements in each of these sectors are expected

to relax these constraints measurably. For these reasons, the team judged these constraints to be less binding

than the forex constraint. A heat map summarizing the evidence across the different factors, including the

top binding forex constraint, appears in Appendix II.

Power

Frequent and prolonged power outages affect all sectors of Ethiopia’s economy, harming productivity,

employment, and export earnings (Abdisa, 2018; Carlsson et al, 2018). Ethiopia has embarked on an

expansion of its generation capacity with projects slated for completion in the next couple of years,

including the massive Grand Ethiopia Renaissance Dam. But the obsolescence of transmission and

distribution infrastructure continues to compromise reliable supply. Part of the challenge relates to power

companies’ inability to import equipment for maintenance, upgrading systems, and fuel, all of which rely

on scarce forex. As such, the forex constraint perpetuates itself, as export-oriented manufacturing firms,

which rely heavily on consistent power supplies, struggle to produce, sell abroad, and earn the valuable

forex necessary for maintaining their own operations.

Progress in extending rural access to electricity is on par with SSA and low-income countries. Overall, only

40 percent of Ethiopia’s population has access to electricity (World Bank, 2020a). Rural populations

account for much of this outcome, since nearly 100 percent of urban inhabitants enjoy some measure of

access. Capacity, however, is very problematic as the demands of Ethiopia’s rapidly growing economy and

population go increasingly unmet. Both the 2015 World Bank Enterprise Surveys (WBES) and a 2017

UNDP survey of firms ranked electricity as among the top obstacles to conducting busines. From the

WBES, the number of outages per manufacturing firm is higher in Ethiopia (2015) than comparator

countries Kenya (2018), Uganda (2013), Mozambique (2018); although, Ethiopia appears comparable to

Tanzania (2013) and SSA as a whole, excluding older surveys.

A variety of indicators point to unreliable access to electricity as a constraint on economic activity.

Estimates suggest that Ethiopia’s frequent and lengthy electricity outages raise production costs by 15

percent, and firm-level surveys reveal losses due to outages and greater dependence on self-generated power

(Abdisa, 2018; Carlsson et al, 2018). Meanwhile, evidence shows firms increasingly substitute away from

power-intensive capital investments in favor of labor. As a consequence, the composition of Ethiopia’s

manufacturing sector disproportionately favors micro and small enterprise activities, which rely relatively

less on electricity-dependent capital. Even among households, the constraint is detectable with usage of

low-load appliances, in spite of income levels that could sustain more electricity consumption.

26


Urban versus rural residence and variation in wealth drive differences in access to electricity. Nationwide,

nearly 60 percent of female-headed households are connected to the grid, compared to about 27 percent of

male-headed households. Female-headed households are disproportionately located in urban areas where

access is nearly complete. Within urban areas, access to the grid is similar among male- and female-headed

households. In rural areas, connection to the grid is higher for female-headed households (at about 24

percent) compared to male-headed households (15 percent). In general, the cost of electricity is not a

widespread burden for households.

Finance

Ethiopia’s government exerts a variety of controls over the banking sector that constrain firms’ access to

finance. Arguably the most distortionary intervention was the requirement for banks to purchase National

Bank of Ethiopia (NBE) bonds equal to 27 percent of the value of funds loaned, a form of financial

repression that effectively reduces the available supply of capital to private firms.15 But while earlier World

Bank Enterprise Surveys (WBES) cited access to finance as a top constraint among Ethiopia’s firms, a more

recent UNDP survey ranked access to finance below power shortages, forex, access to domestic raw

material, and even internet access. WBES data also suggest that Ethiopia is not exceptional with respect to

the low percentage of firms financed by banks. That said, questions of access remain. Since commercial

banks generally serve Ethiopia’s largest firms, and regionally-focused microfinance institutions (MFIs)

tend to micro-scale enterprises, the needs of the “missing middle” of small and medium-size enterprises

(SMEs) largely go unmet (Dalberg, 2019).

Ethiopia shows mixed signals of constrained access to finance. Savings rates have risen, increasing the

supply of funds for lending, and as a result, private bank lending to the private sector has risen by 22 percent

annually since 2014. However, firm-level surveys suggest the bulk of investments continue to be self-

financed or served by the black market. Risk assessments remain challenging owing to the absence of

credible risk-rating services, further curbing the flow of funds.

Gender and social inclusion considerations

Access to finance remains a critical barrier for women’s economic empowerment. Barely a quarter of

Ethiopians (26 percent) save money at financial institutions, and being female, rural, unemployed, and less

educated decreases the likelihood of having a bank account. Trends since 2014, show that the gender gap

in access to the formal banking sector is increasing; in 2017, only 20 percent of women, compared to 41

percent of men, had a bank account (Buehren et al, 2019). Women comprise 46.8 percent of microfinance

institution clients. But women entrepreneurs have difficulty graduating from micro-finance institutions to

commercial bank lending, which is characterized by high minimum loan sizes, higher interest rates, and

burdensome collateral requirements. High failure rates among women-owned SME is due in part to the

tendency of Ethiopian financial institutions to rely upon “relationship lending”, basing credit analyses not

only on borrowers’ repayment track records, but their standing in the community, experience, and

education. These factors work against women, who cannot easily penetrate the elite, male-dominated

networks through which these relationships are built (Buehren et al, 2019).

15 This policy was discontinued in early 2020 as part of a larger effort to loosen restrictions on finance.

27

VI. Non-binding Constraints Considered Other constraints considered by the team, including transport and logistics, human capital, land, water and

sanitation, and institutional and micro-risks also pose costs to firms but ultimately were judged to be non-

binding. Again, recent progress across these factors has lightened their drag on economic growth.

Transport and Logistics

While not considered to be a binding constraint, Ethiopia’s current state of transport and logistics

performance impose an additional layer of costs to firms seeking to export and generate forex. Relative to

its comparators, Ethiopia’s transport and logistics rank poorly. The World Bank’s Logistics Performance

Index (LPI), a composite score based on infrastructure, timeliness, customs, and logistics quality, places

Ethiopia last among its peers, nearly 30 percent below the LPI leader Kenya. Much of this outcome owes

to Ethiopia’s poor road quality and connectivity, for which the African Development Bank and the World

Bank both report low scores. Meanwhile, Ethiopia’s rail network also lags far behind its comparators, with

the average rail density of its comparators exceeding Ethiopia’s by more than twelve times. That said, the

percentage of Ethiopian firms reporting transportation as a major constraint to doing business, around 8

percent, falls well below the average rate of 25 percent reported among its comparator countries. In the

World Bank’s Ease of Doing Business rankings, Ethiopia is about average for Sub-Saharan Africa on the

Trading Across Borders score, which includes assessments of both internal transport costs plus the costs of

documentary and border compliance.

Unit costs of inland transport are comparable to other countries. Compared to Kenya, for example, where

the distance to port is shorter, the inland cost is about the same as for Ethiopia. Upon reaching the port,

however, the story changes. Ethiopia’s export transit time, 42 days, far exceeds its landlocked comparators

Rwanda and Uganda, and is twice as long as China, Vietnam, and Kenya. Underlying these delays are not

only the long inland distance to the Djibouti port but also the document preparation, port handling, and

customs clearance processes, which are substantially longer and costlier than Ethiopia’s comparators.

Consequently, export container costs are higher than Kenya’s, and two to three times higher than

Bangladesh and Vietnam, Ethiopia’s competitors in textiles and apparel. Meanwhile, imports suffer

additional delays, insomuch as Ethiopian importers must pay their suppliers in foreign currency, an outcome

which likely explains some of the difference between import and export customs clearance times, about 11

days. Research literature points to a link between expansions in transportation (e.g. roads, rail) on poverty

reduction, consumption, agriculture production, and overall economic growth (Nakamura et al, 2019; Iimi

et al, 2019; Dercon et al., 2009).

Human Capital

The last two decades have witnessed significant improvements in Ethiopia’s formal education and literacy,

two key indicators of its human capital. Currently, enrollment in primary education is around 100 percent,

and secondary education has risen steadily to reach around 40 percent (World Bank, 2020a). And while

tertiary education remains low at around 10 percent, it has also increased dramatically year-over-year in the

last decade. Among Ethiopia’s youngest citizens, literacy rates exceed 80 percent. Meanwhile, girls and

young women account for a growing portion of these human capital improvements, to the point that, among

Ethiopia’s teenage cohorts, the gender gap in literacy and primary education has shrunk to nearly zero.

28

Data show that income’s response to education at all levels (primary, secondary, and tertiary) over the past

ten years has diminished or stagnated, suggesting that the supply of labor is growing at a faster rate than its

demand. Mincer regressions estimated on data covering the period 2009 to 2015 show the percentage rise

in income in response to completing a college degree fell slightly from 14.5 percent to 13.4 percent. This

result implies that labor, particularly the present supply of highly skilled workers, appears not to constrain

the ability of firms to produce and grow.

That said, interviews with stakeholders also suggest firms remain dissatisfied with elements of workforce

quality. Certain “soft” skills, including teamwork, creativity, and initiative hamper firms’ ability to innovate

and grow. Weak linkages between universities and industry lead to some mismatch of skills with jobs,

potentially stifling firm investment and limiting income growth among educated workers. Other concerns

center on the level of human capital within government bureaucracies, namely the ability of policy makers

to navigate and regulate a rapidly evolving and modernizing economy.


Despite Ethiopia’s important progress, significant socioeconomic and gender disparities persist (Buehrens

et al., 2019). Ethiopia’s Ministry of Education (MoE) reports students in the poorest quintile of woredas

complete the eighth grade at a rate 36 percent below the national average (MoE, 2019). In regions with high

rates of early marriage and childbearing, including Afar, Somali, and Benishangul-Gumuz, girls grade

school attendance is as low as 74 percent the rate of boys and girls secondary education attendance falls

below 50 percent of boys, compared to 90 percent nationwide (Ibid.). Women comprised 38 percent of

students entering tertiary education, but of these, only 25 percent complete their studies (Ibid.).

Land

In Ethiopia, all land is officially owned by the government, complicating certain endeavors of investment

and management. Recent reforms to land policies, however, including one of the largest land certification

campaigns in Africa around the turn of the last century, have introduced land use rights through long-term

leases, as well as permission to rent, transfer of usage rights, and bequests. In addition, the government’s

introduction of industrial parks throughout the country has unlocked land for large, foreign-owned factories

and other manufacturing and transport logistics activity. These reforms have notably coincided with the

reduction in land constraints facing firms throughout the country, an outcome reflected in the World Bank

Enterprise Surveys in which firms identified land as an obstacle 23 percent of the time in 2011 and only 4

percent in 2015. That said, land continues to account for the bulk of the government’s dispute resolution

activities, with processes often lasting many months, and Ethiopia compares unfavorably to its neighboring

countries for its time and cost of transferring land between parties and the reliability and transparency of its

administrative processes.


According to Ethiopia’s constitution, women have rights to acquire, administer, control, use and transfer

land or other property, and use it as collateral (World Bank, 2009). Local traditions, however, still favor

men, who are likelier to inherit land, with older sons receiving the larger, more productive plots. Although

current law provides for joint titling of land used or acquired by married couples as well as those in informal

unions, women who are divorced or never married may end up landless, since most women obtain and keep

29

land through their marriages. Women’s land rights are still contested in courts and in practice, particularly

in Ethiopia’s south (Ibid.).

Water and Sanitation

Ethiopia has abundant water resources. Moderate to high productivity aquifers underlie most of the

country’s territory. Over 90 percent of all water withdrawals, underground and surface, are for agricultural

use, compared to the global average of 70 percent. Agricultural withdrawals, though high, are under 9

percent of available renewable resources. Despite these resources, much of Ethiopia’s rural population faces

challenges in terms of household access to safe drinking water and sanitation service utilization. Most gaps

in service follow a rural-urban pattern, though recent investments in rural access over the last ten years have

helped matters. In numerous surveys of firms, water insufficiency does not appear as a significant obstacle

when ranked against other potential issues, though Ethiopian firms may report problems more frequently

than regional peers. In the absence of absolute scarcity in much of the country, the technical cost of

withdrawals primarily drives the price of provision.

Micro Risks

Micro risks pertain to the policies and conditions relevant to the appropriability of profits—taxation,

protection of property rights, and business regulation. Ethiopia’s performance across the different

dimensions of micro-risk are far from ideal. The World Economic Forum’s Global Competitiveness Index

(2018) ranks Ethiopia 108 out of 148 countries surveyed, with an index score of 3.8 out of 7. Firms reported

foreign currency regulations, corruption, access to finance, and inefficient government bureaucracies

among the biggest problematic factors. The World Bank’s Enterprise Survey (WBES) captures a similar

set of indicators.16 In 2019, Ethiopia ranked 159 (out of 190 countries) with an Ease of Doing Business

score of 49.06 (out of 100), though recent years show a slight deterioration in Ethiopia’s rank and score.

Results from the most recent surveys appear in Table 1.

Table 1 Ranking Problems for Businesses in Ethiopia

Rank

Enterprise Surveys Global Competitiveness

Index

2015 2017/18

1 Access to Finance (40.4%) Forex Regulations (17.4%)

2 Electricity (10.1%) Corruption (15.9%)

3 Customs and trade (9.9%) Access to Finance (11.1%)

4 Tax rates (7.6%) Inefficient Govt. (10.3%)

5 Corruption (7.1%) Inflation (6.8%)

Source: World Bank Enterprise Surveys 2015, World Economic Forum

2017, 2013. Note: Percent reporting in parentheses.

That said, Ethiopia’s major constraints fall within the range of outcomes observed in a set of comparator

countries, albeit mostly on the lower end (Figure 10). In short, while Ethiopian firms struggle to cope with

16 Based on the two most recent WBES, most firms in Ethiopia consistently point to access to finance as the biggest

obstacle. No direct question on forex appears in the WBES, and as such, responses may have conflated access to forex

and other types of finance.

30

the obstacles and threats to profitability, its outcomes are not exceptional among its economic and

geographic peers.

Figure 10 Major constraints cited by firms across comparator countries.

Source: World Bank Enterprise Survey, 2015.

Customs and Trade

Customs and trade constraints can often impede the international flow of goods. Outside of the general

forex shortage, bank approvals to release forex are inconsistent and can take weeks to obtain. And

Ethiopia’s documentary compliance costs for imports are more than double those for SSA, and for exports

are about the same as SSA but still five times higher than high income OECD countries. Border compliance

costs are much lower than SSA.

Taxes and Tax Administration

Ethiopia collects inadequate tax revenue due to an inefficient tax system. The government has employed

financial repression as a revenue mechanism in part to compensate for this inefficiency. Tax revenue as a

share of GDP has declined sharply since 2012 as growth has slowed, evidence that tax burdens have likely

not slowed growth. However, a relative fall in tax revenue may be a symptom of the growth (and import)

slowdown a condition which will worsen the consolidated public sector deficit (CID, 2019).

Government Coordination

Overlapping and sometimes conflicting authorities across Ethiopia’s government have led to complaints

from firms that rely on the well-coordinated administration of regulations and procedures. This is

particularly apparent among the entities involved in trade administration. While dissatisfaction with

government coordination may be a frequently encountered complaint, it is not considered a binding

constraint.

Corruption

Transparent and fairly applied rules of the regulatory environment are critical to the success of private

firms’ operations. When these rules are obscured or bent due to corruption, firms may elect to limit their

EthiopiaEthiopia

EthiopiaEthiopia

Ethiopia

Ethiopia

0

10

20

30

40

50

60

Access toFinance

tax rates taxadministration

customs andtrade

electricity transportation

percent of

firms

31

investment or exit the market entirely. Using the most recent data from the WBES, Ethiopia leads its

comparators in the incidence and depth of bribery requests, but these outcomes do not appear out of line

for countries at its income level. And while about 27 percent of Ethiopian firms report corruption as a major

constraint to doing business, this is well within the range of its comparators, and as detailed above, only

about 7 percent of firms cite corruption as their biggest obstacle. Meanwhile, less than 10 percent report

the courts as a major constraint: the lowest value among the comparators. Based on these results, the present

analysis flags corruption as problematic but not a binding constraint on private sector activity.

VII. Conclusion

The Constraints Analysis determines that Ethiopia’s top binding constraint to private investment and

economic growth is the shortage of forex. Without forex, Ethiopian firms, particularly manufacturers,

cannot import machinery, supplies, equipment and parts necessary for their operation and growth. As part

of Ethiopia’s Homegrown Economic Reform Agenda, the manufacturing sector plays a critical role in

creating jobs, raising incomes, generating exports, and increasing the country’s capacity and know-how

for production. Power and access to finance also bind on Ethiopia’s growth, but to lesser degrees, and

signals suggest imminent improvements in these two factors. Additional factors, including human capital,

transport and logistics, land, and other micro risks were judged to be costly but not binding.

Recent packages of support from the World Bank and IMF have raised the possibility of reforming

elements of Ethiopia’s macro-policies, including relaxing its fixed currency exchange rate regime beyond

the routinely incremental depreciations. Market and lender disciplines on Ethiopia’s borrowing habits

have also led to reduced borrowing, particularly externally, inviting Ethiopia to more quickly discharge its

debt burden and confront the inefficiencies and distortions of its state-owned enterprises. Additional

improvements in Ethiopia’s financial sector, both recent and imminent, promise to further loosen lines of

credit to firms eager to invest and grow.

Notwithstanding these positive signs, the economic shock resulting from the ongoing COVID-19

pandemic and the repeated threats to the country’s federal configuration of power raise the specter of

larger political trials to come. In the near-term, managing rival domestic interests in a budding democracy

and shepherding a developing economy at once beset by Marxism’s legacy, and modern capitalist forces

will test Ethiopia’s leadership and shape the coming landscape of conflicts and decisions.

32

References

Abdisa, L. (2018) Power Outages, Its Economic Cost and Firm Performance: Evidence from Ethiopia.

MPRA Paper No. 88217. University of Milan.

Baye, T. G. (2017) Poverty, Peasantry, and Agriculture in Ethiopia. Annals of Agrarian Science. 15:420-

430.

Bechewe, F., B. Guush, B. Minten, A. Taffesse (2018) Agricultural Transformation in Africa? Assessing

the Evidence in Ethiopia. World Development. 105(2018):286-298.

Berhane, G., B. Minten, F. Bachewe, and B. Koru (2020) Crop Productivity and Potential. In Dorosh, P.

and B. Minten (Eds.) Ethiopia’s Agrifood System: Past Trends, Present Challenges, and Future Scenarios.

International Food Policy Research Institute.

Bruegel (2020) Real Effective Exchange Rates for 178 Countries: a New Database.

Buehren, N., M. Goldstein, P. Gonzalez, A. Hagos, D. Kirkwood, P. Paskov, M. Poulin, C. Raja. 2019.

Africa Gender Innovation Lab Ethiopia Gender Diagnostic: Building the Evidence Base to Address Gender

Inequality in Ethiopia. World Bank.

Carlsson, F., E. Demeke, P. Martinsson, and T. Tesemma (2018) Cost of Power Outages for Manufacturing

Firms in Ethiopia: a Stated Preference Study. Working Paper in Economics No. 732. University of

Gothenburg.

CID (2019). Addressing Macroeconomic Imbalances to Sustain Growth in Ethiopia: Initial Findings of a

Growth Diagnostic. The Growth Lab at the Center for International Development at Harvard University.

Dagnew, G. (1992) Exchange Rate Policy in Ethiopia: An Agenda for Action. Ethiopian Journal of

Economics. 1(1):71-98.

Dalberg (2019) Ethiopia Threshold Program Preparation: Financial Sector Review.

Degefa, D. (2001) The Parallel Foreign Exchange Market and Macroeconomic Performance in Ethiopia.

AERC Research Paper 107. African Economic Research Consortium.

Denoeux, G. (2019) Perched Between Promise and Foreboding: A Political Economy Analysis of Ethiopia.

MCC-commissioned report.

Dercon, S., D. Gilligan, J. Hoddinott, T. Woldehanna (2009) The Impact of Agricultural Extension and

Roads on Poverty and Consumption Growth in Fifteen Ethiopian Villages. American Journal of

Agricultural Economics. 91(4):1007-1021.

Dorosh, P., S. Robinson, and H. Ahmed (2009) Economic Implications of Foreign Exchange Rationing in

Ethiopia. International Food Policy Research Institute.

FAS (2020) Ethiopia Oilseeds Report Annual. Report Number: ET2020-0001. Foreign Agricultural

Service. United States Department of Agriculture.

Fuglie, K. (2019) International Agricultural Productivity. Economic Research Service. US Department of

Agriculture.

Haile, F. (2019) The Exchange Rate: Why It Matters for Structural Transformation and Growth in Ethiopia.

Policy Research Working Paper 8868. World Bank Group.

Haile, F. (2015) Exchange Rate Movements and Export Performance in Ethiopia. Mimeo. World Bank.

https://mpra.ub.uni-muenchen.de/88217/1/MPRA_paper_88217.pdf

https://mpra.ub.uni-muenchen.de/88217/1/MPRA_paper_88217.pdf

https://www.sciencedirect.com/science/article/abs/pii/S0305750X17302152

https://www.sciencedirect.com/science/article/abs/pii/S0305750X17302152

https://www.ifpri.org/publication/ethiopias-agrifood-system-past-trends-present-challenges-and-future-scenarios



https://www.bruegel.org/publications/datasets/real-effective-exchange-rates-for-178-countries-a-new-database/

https://openknowledge.worldbank.org/handle/10986/31435



https://gupea.ub.gu.se/bitstream/2077/56337/1/gupea_2077_56337_1.pdf



https://ideas.repec.org/a/ags/eeaeje/252975.html

https://ideas.repec.org/a/ags/eeaeje/252975.html

https://publications.aercafricalibrary.org/bitstream/handle/123456789/448/RP107.pdf?sequence=1&isAllowed=y

https://publications.aercafricalibrary.org/bitstream/handle/123456789/448/RP107.pdf?sequence=1&isAllowed=y

https://academic.oup.com/ajae/article-abstract/91/4/1007/48507



https://www.ifpri.org/publication/economic-implications-foreign-exchange-rationing-ethiopia-0

https://www.ifpri.org/publication/economic-implications-foreign-exchange-rationing-ethiopia-0

https://apps.fas.usda.gov/newgainapi/api/Report/DownloadReportByFileName?fileName=Ethiopia%20Oilseeds%20Report%20Annual_Addis%20Ababa_Ethiopia_01-16-2020

https://apps.fas.usda.gov/newgainapi/api/Report/DownloadReportByFileName?fileName=Ethiopia%20Oilseeds%20Report%20Annual_Addis%20Ababa_Ethiopia_01-16-2020

https://www.ers.usda.gov/data-products/international-agricultural-productivity/

https://www.ers.usda.gov/data-products/international-agricultural-productivity/

http://documents1.worldbank.org/curated/en/898821559134798352/pdf/The-Exchange-Rate-Why-It-Matters-for-Structural-Transformation-and-Growth-in-Ethiopia.pdf

http://documents1.worldbank.org/curated/en/898821559134798352/pdf/The-Exchange-Rate-Why-It-Matters-for-Structural-Transformation-and-Growth-in-Ethiopia.pdf

33

Iimi, A., H. Adamtei, J. Markland, and E. Tsehaye (2019) Port Rail Connectivity and Agricultural

Production: Evidence from a Large Sample of Farmers in Ethiopia. Journal of Applied Economics.

22(1):151-172.

IMF (2020) The Federal Democratic Republic of Ethiopia: 2019 Article IV Consultation and Requests for

Three-Year Arrangement under the Extended Credit Facility and an Arrangement under the Extended Fund

Facility-Press Release and Staff Report. International Monetary Fund.

IMF (2018) The Federal Democratic Republic of Ethiopia: Joint Bank-Fund Debt Sustainability Analysis-

Update 2018. International Development Association and International Monetary Fund.

IOM (2020) IOM Report: Ethiopia Records More than 1.8 Million Internally Displaced in 2020.

International Organization for Migration. United Nations.

Library of Congress (1993) “Ethiopia: a Country Study.” T. Ofcansky and L. Berry (Eds.). Federal Research

Division, Library of Congress.

Mengistu, A., E. Montero, and A. Segura (2017) The Impacts of Exchange Rate movements on Prices and

Trade across Sectors: Evidence from Ethiopian Firms. Accompanying Summary Note published by Centre

for Economic Policy Research.

Ministry of Education (2019) Education Statistics Annual Abstract 2011 E.C. (2018/2019). Federal

Democratic Republic of Ethiopia.

Ministry of Finance (2019) Annual Public Sector Debt Portfolio Report for the Year 2018/2019. No. 20.

Debt Management Directorate. Ministry of Finance. Federal Democratic Republic of Ethiopia.

Molla, K. and B. Assefa (2019) Exchange Rates and Export Dynamics: Firm Level Evidence from Ethiopia.

Working Paper 024. Policy Studies Institute.

Nakamura, S., T. Bundervoet, and M. Nuru (2019) Rural Roads, Poverty, and Resilience: Evidence from

Ethiopia. Journal of Development Studies. 56(10):1838-1855.

Nguyen, H. (2014) Real Exchange Rate and Export Growth in Ethiopia. Background paper commissioned

for the 3rd Ethiopia Economic Update: Strengthening Export Performance through Improved

Competitiveness. The World Bank.

Oqubay, A. (2019) The Structure and Performance of the Ethiopian Manufacturing Sector. In C. Fantu, A.

Oqubay, and C. Cramer (Eds.) The Oxford Handbook of the Ethiopian Economy. Oxford University Press.

Policy Studies Institute (2020) Ethiopia Productivity Report. Policy Studies Institute and National Graduate

Institute for Policy Studies.

Rodrik, D. (2008) The Real Exchange Rate and Economic Growth. Brookings Papers on Economic

Activity. Fall: 365-412.

Schmidt, E., P. Dorosh, M. K. Jemal, and J. Smart (2020) Urbanization and Structural Transformation. In

Dorosh, P. and B. Minten (Eds.) Ethiopia’s Agrifood System: Past Trends, Present Challenges, and Future

Scenarios. International Food Policy Research Institute.

Siba, E. and M. Gebreeyesus (2017) Learning to Export and Learning from Exporting: The case of

Ethipoian Manufacturing. Journal of African Economies. 26(1):1-23.

Simoes, A., C. Hidalgo. (2011) The Economic Complexity Observatory: An Analytical Tool for

Understanding the Dynamics of Economic Development. Workshops at the Twenty-Fifth AAAI

Conference on Artificial Intelligence.

Wondemu, K. and D. Potts (2016) The Impact of the Real Exchange Rate Changes on Export Performance

in Tanzania and Ethiopia. Working Paper Series No. 240. African Development Bank.

https://www.imf.org/en/Publications/CR/Issues/2020/01/28/The-Federal-Democratic-Republic-of-Ethiopia-2019-Article-IV-Consultation-and-Requests-for-48987



http://documents1.worldbank.org/curated/en/690431545161133088/pdf/wbg-ethiopia-debt-sustainability-analysis-2018-update-final-dec0718-12142018-636805946102250783.pdf

http://documents1.worldbank.org/curated/en/690431545161133088/pdf/wbg-ethiopia-debt-sustainability-analysis-2018-update-final-dec0718-12142018-636805946102250783.pdf

https://www.iom.int/news/iom-report-ethiopia-records-more-18-million-internally-displaced-2020

https://www.iom.int/news/iom-report-ethiopia-records-more-18-million-internally-displaced-2020

https://tile.loc.gov/storage-services/master/frd/frdcstdy/et/ethiopiacountrys00ofca_0/ethiopiacountrys00ofca_0.pdf

https://tile.loc.gov/storage-services/master/frd/frdcstdy/et/ethiopiacountrys00ofca_0/ethiopiacountrys00ofca_0.pdf

https://pedl.cepr.org/publications/impacts-exchange-rate-movements-prices-and-trade-across-sectors-evidence-ethiopian

http://www.moe.gov.et/en/EduStat

http://www.moe.gov.et/en/EduStat

http://www.mofed.gov.et/documents/10182/13981/Annual+Debt+Portfolio+Report+and+Analysis+%282018+19%29No.+20.pdf/bf158cc5-5dd1-4f73-aaf8-1009a8d473f3

http://www.mofed.gov.et/documents/10182/13981/Annual+Debt+Portfolio+Report+and+Analysis+%282018+19%29No.+20.pdf/bf158cc5-5dd1-4f73-aaf8-1009a8d473f3

https://www.researchgate.net/publication/338254163_Exchange_Rates_and_Export_Dynamics_Firm_Level_Evidence_from_Ethiopia

https://www.researchgate.net/publication/338254163_Exchange_Rates_and_Export_Dynamics_Firm_Level_Evidence_from_Ethiopia



https://www.tralac.org/images/docs/13204/the-structure-and-performance-of-the-ethiopian-manufacturing-sector-afdb-wps-299-june-2018.pdf



https://www.jstor.org/stable/pdf/27720404.pdf?casa_token=RvffHHkuwSMAAAAA:94SkYx3cPDssbnBKyDarfA32U1Sx1iISaT9IqBG4JPGj4wPa0uA4oNqGIHSv9shH1VNdeFG5tPqhiDgXJl-8S0WJ-GZHYzmxFW9d_A271T3B-l28pA

https://www.jstor.org/stable/pdf/27720404.pdf?casa_token=RvffHHkuwSMAAAAA:94SkYx3cPDssbnBKyDarfA32U1Sx1iISaT9IqBG4JPGj4wPa0uA4oNqGIHSv9shH1VNdeFG5tPqhiDgXJl-8S0WJ-GZHYzmxFW9d_A271T3B-l28pA

https://oec.world/

https://oec.world/

https://oec.world/

https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Working_Paper_240_-_The_Impact_of_the_Real_Exchange_Rate_Changes_on_Export_Performance_in_Tanzania_and_Ethiopia.pdf

https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Working_Paper_240_-_The_Impact_of_the_Real_Exchange_Rate_Changes_on_Export_Performance_in_Tanzania_and_Ethiopia.pdf

34

World Bank (2009) Unleashing the Potential of Ethiopian Women: Trends and Options for Economic

Empowerment. World Bank.

World Bank (2017). Ethiopia: Employment and Jobs Study. Poverty Global Practice, Africa Region.

World Bank (2020a) World Development Indicators Databank. Ethiopia.

World Bank (2020b) Poverty and Equity Databank. Ethiopia.

World Bank (2020c) Ethiopia Poverty Assessment: Harnessing Continued Growth for Accelerated Poverty

Reduction. Washington DC.

World Bank (2020d) Enterprise Surveys. Ethiopia.

UNDP (2019) Human Development Report 2019. United Nations Development Programme.



http://documents1.worldbank.org/curated/en/443391562238337443/pdf/Ethiopia-Employment-and-Jobs-Study.pdf

https://datacatalog.worldbank.org/dataset/world-development-indicators

https://databank.worldbank.org/source/poverty-and-equity

http://documents1.worldbank.org/curated/en/749741585805798027/pdf/Ethiopia-Poverty-Assessment-Harnessing-Continued-Growth-for-Accelerated-Poverty-Reduction-Overview.pdf

http://documents1.worldbank.org/curated/en/749741585805798027/pdf/Ethiopia-Poverty-Assessment-Harnessing-Continued-Growth-for-Accelerated-Poverty-Reduction-Overview.pdf

https://www.enterprisesurveys.org/en/enterprisesurveys

http://hdr.undp.org/en

35

Appendix 1: MCC Constraints Analysis Process

MCC kicked off THP development in February 2019 with a visit by the MCC Head of Agency. The MCC

Ethiopia THP team first traveled to Ethiopia in March 2019 to launch the constraints analysis (CA), meeting

with dozens of Government of Ethiopia (GoE) representatives and stakeholders from the private sector and

civil society. At MCC’s request, the Ministry of Finance (MoF) established a technical team and a higher-

level advisory panel to support and provide feedback to the CA. The technical team and the advisory panel

are made up of representatives from the MoF, the Ethiopia Investment Commission, the National Bank of

Ethiopia (NBE), the Ministry of Women and Children, the National Planning Commission, and the Ethiopia

Chamber of Commerce, as well as economists from prominent think tanks and academia.

MCC conducted the CA in concert with The Growth Lab at Harvard University’s Center for International

Development (CID), who had already been engaged by USAID through a three-year cooperative agreement

to produce a growth diagnostic and to strengthen the capacity of the GoE to diagnose and address constraints

to economic growth. In order to accelerate the CA, MCC and CID agreed to refresh a growth diagnostic

that was concluded by USAID in 2014.

The MCC team made another trip in June 2019 to collect more data and presented the major themes

emerging from the CA to the technical team and the advisory panel. In September 2019, team members

presented the findings of the Constraints Analysis to the advisory panel. The panel supported the findings,

which are consistent with and likely informed the GoE recently-issued Homegrown Reform Agenda.

The MCC also commissioned a political economy analysis (PEA) to describe and analyze the historical

legacies that continue to impact the country. It identifies the interests, incentives, resources, strategies, and

relationships among key political and economic actors, including the formal and informal rules that govern

interaction among them. In addition, the Finance, Investment and Trade (FIT) team engaged Dalberg to

conduct a financial sector review and a productive sector analysis. These studies drew on in-country

interviews with a wide range of stakeholders, including business owners, multinational corporations,

development partners, government agencies, financial sector specialists, financial institutions and

management consulting firms. The findings of the PEA and the Dalberg studies have supplemented and

enriched the CA findings.

36

Appendix 2: Heat Map of Constraints

Rank Factor

Diagnostic Test

High

Shadow

Price

Changes

in

Changes

Bypass

the

Constraint

Camels

and

Hippos17

1. Top Binding Forex shortage

2. Other Binding Power

Finance

3. Non-binding

Human Capital

Land

Transport & Logistics

Water, Sanitation & Health

Micro Risks

Constraint Evidence Legend

Strong

Mixed

Weak/None

17 “Camels and Hippos” is a short-hand reference to firms that thrive in the absence of particular resources. Camels,

for example, thrive in water-scarce environments, e.g. deserts. In the case of Ethiopia, this category of diagnostic

captures firms that thrive in a forex scarce environment.

Ethiopia Constraints Analysis Report 2020 · Ethiopia’s inexpensive labor pool, emerging domestic...

Documents

Transcript of Ethiopia Constraints Analysis Report 2020 · Ethiopia’s inexpensive labor pool, emerging domestic...